Finance Digest Magazine

New ISA boosts millennials’ home ownership dreams

Funding Circle ISA could propel millennials onto the property ladder 6 years sooner than the average cash ISA

Projected annual returns of 5.5 – 6.5% are up to seven times higher

58% of aspiring first-time buyers are struggling to build a deposit for their first home

Aspiring first-time buyers could propel themselves onto the property ladder half a decade sooner, thanks to the newest ISA from Funding Circle, the UK’s leading small business loans platform.

The ‘Innovative Finance ISA’ projects returns up to seven times[i] higher than the average instant-access cash ISA in the UK, with less volatility than is traditionally experienced in Stocks and Shares ISAs.[ii]

That means 18-year-olds could dream of owning a home by the age of 30 instead of 36, which is often around the time people decide to start a family.[iii]

Currently it would take around 18 years to save the minimum £24,000 needed to meet the typical deposit on a first home in the UK, when saving £100 a month. If the rate of inflation continues to track higher than interest rates, then it will take even longer to earn enough for a deposit.

The Funding Circle ISA projects annual returns of 5.5 – 6.5%,[iv] providing the average young person with the opportunity to earn enough for a deposit in just over 12 years.[v] Investing in a Stocks and Shares ISA could help people reach this target even more quickly, but extreme price movements are common. For example, last year the FTSE 100 fell by more than 12%.

Unlike help-to-buy ISAs, investors are free to use the interest they receive for any purpose they like – they do not have to spend the money on buying a property.

Research suggests that around 58%[vi] of aspiring first-time buyers are struggling to build a deposit. And while low interest rates on cash ISAs are a significant factor; house price growth, an increase in the cost of living, and a rise in student-loan debt makes building a nest-egg especially challenging.

James Meekings, Funding Circle’s UK Managing Director and co-founder, said: “With such low interest rates available across the ISA market, setting enough money aside for a house deposit can seem daunting for young people. Lending through the Funding Circle ISA is one of many ways to diversify your investments and potentially earn higher returns – small investments have the potential for meaningful growth. There’s also the added bonus of lending directly to established small businesses in the UK, which creates jobs and boosts the wider economy.”

James Elliott, 27, from London, is about to climb onto the first rung of the property ladder in April, after 6 years of lending to small businesses through Funding Circle. “Having started using Funding Circle when I was 21, my funds with them are now a significant part of my deposit for getting on the property ladder, alongside a Help to Buy ISA.”

“The interest has far exceeded the amount I’d get back from a normal savings account, particularly when you resist the temptation to withdraw and reinvest instead, and I’ve been able to top-up whenever I’ve had any minor windfalls. While tax returns were a challenge early on, the Funding Circle ISA has removed this requirement and saves a painful chore.”

Launched in 2010, Funding Circle brings together industry-leading risk management policies and cutting-edge technology, enabling investors to earn attractive returns by lending directly to established and creditworthy UK businesses. With a strong track record[vii] and an easy-to-use online experience, creating an account can take just a few minutes; while a simple choice between two risk profiles allows investors to quickly build a unique and diversified portfolio of loans. There are also options to access funds early at no extra cost.[viii]

[i]The average instant-access cash Isa rate of return was 0.94% AER in January 2019, according to Moneyfacts data

[ii]Although returns aren’t guaranteed when lending, diversifying by lending small amounts to each business helps avoid the extreme price movements often experienced with equity investments. 91% of investors who have diversified for at least a year have earned 4% or more annually, after fees and bad debt.

[iii]The average age of first-time mothers was 28.8 years in 2017, unchanged since 2016; the average age of all fathers increased to 33.4 years in 2017, up from 33.3 years in 2016. Source: Office For National Statistics

[iv]The rates shown are the annual projected returns, after fees and bad debts, that a diversified investor could earn with the Balanced lending option as of 27/02/19. Actual returns may be higher or lower than projected, for example due to the performance of the individual loans funds are matched with, or a change in macroeconomic conditions. By lending to businesses capital is at risk. Not covered by the Financial Services Compensation Scheme. Tax rules depend on circumstances and may change.

[vii]Loans taken out since 2012 are projected to deliver between 4.7 – 7.3% per year. It can take up to five years for loans to be fully repaid, so these ranges take into account how loans are currently performing and how we currently expect them to perform in future. Data is from Funding Circle. Find more detail at fundingcircle.com/uk/statistics. Past performance is not a guide to future performance.

[viii]Funds can be withdrawn early with no fees by selling loans. Selling loans is not guaranteed and depends on demand from other investors looking to buy at that time. A loan can be sold only if it is active with no material credit issues, the business is still trading and it is not in the last month of it’s term.